Much Ado About Little

By

Cheryl Strauss Einhorn

Updated Oct. 2, 2000 12:01 a.m. ET

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A year ago last week, 15 European Central Banks announced their intention to boost gold prices by limiting official sales. Today, however, gold is down 2% from the date of their announcement, to $277 an ounce. It continues to trade near its lowest level in 20 years.

Nor do the prospects for the yellow metal look much brighter between now and yearend. Jeff Christian, head of CPM, a precious-metals research firm, expects gold to remain lackluster, trading in a range between $270 and $290 an ounce. "There isn't much liquidity in the market," he says. "London bullion trading is down." Indeed, trading volume has correction early 30% in the past year, to 25 million ounces per day.

There are several reasons for gold's continued troubles. To begin with, the European banks' self-imposed five-year sales limit actually exceeds the group's previous level of sales. The banks set a 2,000-metric-ton limit, intending to dispose of their gold in annual 400-ton installments. That's well above the average annual 320-350 metric tons the banks had been selling until now.

Out in the open

Too, by formally announcing their yearly sales limit, the banks legitimized the practice of official gold sales -- something that traditionally has been kept secret, and frowned upon by the gold industry. The 15 banks involved in the pact hold about 45% of the world's gold.

The group's disclosure has introduced an unusual degree of transparency into the gold market, which, in part, is what the Europeans intended. But the revelation also has made it easier for non-signatory banks to gauge the market and sell from their own gold holdings. During the past 12 months central banks in Brazil, Canada, Chile, Jordan and Malaysia, among others, have been selling.

Last year, gold demand hit a record, largely because of Year 2000-related fears. Demand climbed 20% from 1998 levels, which had been depressed because of the Asian crisis. But demand this year has fallen. "The absence of Y2K gold investment has made the market very depressed," says George Milling Stanley, at the World Gold Council.

Until fairly recently, at least, gold prices have suffered because of the strength of the U.S. stock market. As global investors have migrated to U.S. assets, the dollar has rallied. And since gold, like most commodities, is traded in dollars, the greenback's muscle has kept a lid on the metal's price.

Key Commodities Index

CRB Group Indexes

9/29

9/22

Yr. Ago

CRB Futures

226.57

226.30

208.00

Industrials

220.74

223.44

193.00

Grain/Oils

163.01

159.72

170.80

Livestock

235.41

230.82

217.20

Energy

348.94

361.30

234.00

Precious Metals

266.93

267.94

254.70

Barron's ~ Bridge Telerate

The buck tops here

The U.S. dollar recently has been trading near its all-time high against the South African rand and the Australian dollar, both currencies of key gold-producing nations. The dollar also has been hitting highs against the euro and the Indian rupee, currencies of major consuming regions. In fact, India is the world's largest buyer of gold.

Such local-currency weakness often encourages producers to sell their production forward to lock in attractive prices. Conversely, for consumers, the dollar's strength has made gold too expensive. The Australians reportedly have been selling more gold than their South African peers, because it is more politically acceptable Down Under. In South Africa, only
Anglogold
is hedging, while other producers are afraid to get caught on the wrong side of a price spike. That's what happened last year to
Ashanti Gold
, in Ghana, which wound up having to unwind its hedge at great cost.

The multi-pronged attack on gold from the international currency markets, coupled with an absence of investor demand, may keep a lid on prices for a while. It might even counteract seasonal factors, which usually make the fourth quarter a strong period for gold sales.

So what did the central banks' year-ago pronouncement actually achieve? In hindsight, basically nothing.

C rude oil prices slid over 5% last week after President Clinton decided to tap part of the Strategic Petroleum Reserve. By Friday the market stabilized after the European Union opted not to tap its own oil reserves. Active November oil finished near $30.82 per barrel.

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